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Programmable Interest

When a lay person is asked about “digital money”, Bitcoin is undoubtedly the first thing that comes to mind and rightfully so.

Ethereum, meanwhile, promised to create “programmable money” through smart contracts and the Ethereum Virtual Machine (EVM). Whereas, one could only send and receive Bitcoin in a trustless way, Ethereum would enable trustless, automated transactions.

DeFi = programmable. In a way, DeFi protocols like Uniswap and Compound exist because assets deposited into their smart contracts can be pooled and programmed to act under certain conditions.

Next stop on the meme train: Programmable Interest

Programmable interest is the ability to systematically separate interest or dividend payments from their underlying principal.

The key feature is a token wrapper that mints a new token with a claim on future interest earned.

Secondary Lending Platforms. Compound’s cTokens and Fulcrum’s iTokens offer the clearest example. When a user deposits Dai into the lending platforms, Compound and Fulcrum automatically issue corresponding cDai and iDai tokens respectively. cDai and iDai are tokens that represent a claim on the deposited Dai AND the interest earned.

In this case, the programmable interest is directed towards a token in order to unlock the capital in the smart contract (while we wait for staking derivatives…). cDai and iDai can be held in cold storage or even traded directly for other assets – all while earning interest.

The arrival of Multi-Collateral Dai also came with the Dai Savings Rate. Unlike Compound and Fulcrum, which generate interest by lending out assets, the DSR has no counterparty and could be considered a “risk-free rate” (*🤞and any other burning red risk disclosures).

The Many Flavors of Dai. The just announced Chai aims to unlock the interest from the DSR. Much like cDai is a claim on Dai locked in Compound and interest accrued, Chai is a claim on Dai locked in the DSR and accrued interest. Given the predictability and low-risk (again, knock on wood) of the DSR, it’s easy to see how Chai could be a daily-use currency that automatically accrues interest without needing to deposit into a savings account.

rDai is another promising programmable interest project. Piggybacking on cDai and iDai, but instead, rDai splits up the claim on the principal with the claim on the accrued interest. The original depositor retains control of his or her deposited assets in the form of rDai, but the accrued interest goes towards a charity, community or developer fund of your choice.

In this model, a game developer could require use of their version of rDai for in game purchases. Users would not need to pay developers directly but by simply holding and spending the game’s rDai currency, it’s funding development of the game.

Splitting up interest from principal may seem like a menial accounting move but so was double-entry bookkeeping.

As such, completely new models and types of financial products are emerging. At the forefront is the no-loss lottery PoolTogether. Like other projects mentioned above, PoolTogether separates the claim on the underlying principal from the claim on the interest accrued, which is pooled together and awarded to a single winner.

It’s a ‘no-loss lottery’ because participants deposit Dai into a smart contract and after one week, they can redeem the principal at face value, but one lucky winner also receives the proceeds from interest earned from the entire pool’s one week in the Compound Dai pool.

Free checking is a long-established model for financial services and Binance seems to believe that free staking will be too. It’s only a matter of time before we demand our money come with free interest – unless the negative interest rate regime proliferates.

Chart of the week: DeFi Lending

Graychain is out with new numbers in its Q3 edition of the Crypto Credit Report. DeFi Lending is part of a larger story of the growth of lending in 2019, led by Genesis and BlockFi.

Long Read of the Week: DeFi and Proof of Stake

"It also reminds us: we can’t keep pretending that blockchains are closed systems whose only incentives are internal to the protocol. Blockchains are too complex and interconnected to analyze in a vacuum. In this regard, the real-world security of PoS is still poorly understood."

Dragonfly partner Haseeb Qureshi writes a socially digestible version of the technical research that Gauntlet CEO Tarun Chitra published last month. The Twitter discussion was lively with Vitalik and Tezos founder Arthur both chiming in.

Tweet of the Week: Tether and DeFi

Tether and DeFi have yet to become fully acquainted with each other. Spencer Noon highlights issues with the token format Tether uses on Ethereum.

Odds and Ends

Zerion raised $2m from Placeholder and others Link
China's Great Firewall blocks access to Etherscan Link
Cami Russo's new book on Ethereum set for summer release Link
Bancor announces New Year's Eve airdrop for new liquidity token Link
30 Days of ETH - November 2019 Link
Maker November update Link
0x v3 goes live on Ethereum mainnet Link
Synthetix partners with THORchain, a cross-chain liquidity pool [Link]

Thoughts and Prognostications

Decentralized liquidity: Maturing the backbone of DeFi [Amentum]
Tell me something good [Two Bit Idiot]
DEXes rising: High performance orderbook exchange on Ethereum [Loopring]
Institutional market insights [Binance]
RSA with Compound's Robert Leshner [Bankless]
DeFi and demand: Part 1 [Santiment]
Cutting through the FUD: China crypto crackdown [Spartan Group]
bZx Kyle Kistner discusses next phase of DeFi Growth [Delphi Digital]
Introducing Synthetix Insights, a new Synthetix newsletter.

Listen of the Week: Synthetix on Unconfirmed Podcast

"In addition to pivoting towards synthetics, we also made a decision to change the monetary policy. Previously, like most ERC20 tokens that launched in 2017/18, we had a fixed supply of tokens. [But] we weren’t seeing high staking rates and we weren’t seeing people participate.
So, we changed the monetary policy to pay inflation to people who were staking, and that had an immediate powerful feedback loop….and the growth accelerated from there."

Synthetix CEO Kain Warwick sits down on the most high-profile crypto podcast, Unconfirmed with Laura Shin, to discuss Synthetix's rise in 2019. Kain provides a startup-first mindset, instead of a crypto-first. Laura and Kain discuss the liquidity of synthetic debt and whether staking SNX provides security like PoS networks.

That's it! Feed back welcome. Just hit reply. A No Hot Takes edition but heavy on the monetary policy.
Written in Brooklyn where the air is cold but smells of pine.

Weekly Dose of DeFi is written by Chris Powers from Concourse Open. Opinions expressed are my own and do not necessarily reflect the opinions of Concourse Open. All content is for informational purposes and is not intended as investment advice.